Question

In practice, auditors commonly set tolerable misstatement for each account at ______.

Answer 1

In practice, auditors commonly set tolerable misstatement for each account as a percentage of the account balance to determine materiality.

Step-by-step explanation:

In practice, auditors commonly set tolerable misstatement for each account at a specific percentage of the account balance. This percentage is called the materiality level or materiality threshold. It represents the maximum amount of misstatement the auditor is willing to accept without considering it material enough to affect the decision-making process of users.

For example, if the tolerable misstatement for an account is set at 5% of the account balance, the auditor would consider any misstatement below this threshold as immaterial. However, any misstatement exceeding 5% would be considered material and require adjustment or disclosure in the financial statements.

The tolerable misstatement is determined based on various factors, including the size and nature of the account, the risk of material misstatement, and the impact on users' decision-making. It is essential for auditors to carefully assess these factors to ensure the accuracy and reliability of financial statements.